Part One: Characteristics and Formation of Corporation

Question 1

in general, what are the three ways in which a “corporation” can be recognized?

Answer 1

1. De Jure corporation;
2. De facto corporation;
3. Corporation by estoppel

Question 2

How is a “De Jure Corporation” formed?

Answer 2

Incorporators must filed articles of incorporation with the secretary of state.

Question 3

What MUST “articles of incorporation” contain?

Answer 3

1. make of corporation;
2. numbers of authorized shares;
3. name and address of registered agent;
4. name and address of each incorporator

Question 4

What MAY “articles of incorporation” contain?

Answer 4

Any other provision regarding operation of corporation that is not inconsistent with law

Question 5

What is the rule regarding a “business purpose” in the “articles of incorporation”?

Answer 5

Traditionally, corporations have included a statement of business purpose and duration in their articles.

Absent such a statement, the RMBCA presumes that a corporation is formed to conduct ANY LAWFUL BUSINESS for a perpetual duration.

A corporation is allowed to undertake any act that is necessary or convenient for carrying on their business purpose, including making charitable donations and lending money to employees, officers, and directors.

Question 6

What is an “ultra vires act”?

Answer 6

If a corporation includes a narrow business purpose in its articles, then it may not undertake activities unrelated to achieving that stated business purpose.

Activities beyond the scope of the narrow business purpose, are “ultra vires”

Question 7

What is the enforceability of “Ultra Vires Contracts”?

Answer 7

Under common law: Ultra vires contracts were void and unenforceable.

Under RMBCA: ultra vires acts are generally enforceable

Question 8

What are the three situations in which the validity of an “ultra vires act” is raised?

Answer 8

1. a SH may sue the corporation to enjoin an ultra vires act;
2. the corporation may sue a D&O for damages for approving an ultra vires act
3. The STATE may bring an action to dissolve a corporation for performing an ultra vires act.

Question 9

What procedures generally apply after “articles of incorporation” are filed?

Answer 9

After the articles are filed, the corporation will have an organizational meeting to:

1. adopt bylaws;
2. elect directors;
3. appoint officers

Question 10

What provisions MAY bylaws contain?

Answer 10

Bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law.

Question 11

Who adopts bylaws?

Answer 11

Bylaws are generally adopted by directors, but may be modified or repealed by a majority vote of either the directors or SH’s.

Question 12

What is a “De Facto Corporation”?

Answer 12

Under certain circumstances, the protections of a corporation may apply even if a corporation was not properly formed.

Question 13

What are the requirements for a “De Facto Corporation”?

Answer 13

1. colorable attempt to comply with formation statute in good faith;
2. business done in corporate name;
3. No knowledge that corporation wasn’t actually formed

Question 14

What is the doctrine of “Corporation by Estoppel”?

Answer 14

Under the common law doctrine of “corporation by estoppel,” persons who have dealt with the corporation as if it were a valid entity will be estopped from denying corporation’s existence.

Question 15

When does the doctrine of “corporation by estoppel” apply?

Answer 15

The doctrine of corporation by estoppel will apply in contract to prevent the corporation OR people dealing with it to get out of contracts. It will not apply to tort victims.

Question 16

What is the effect of a “De Facto Corporation” being found?

Answer 16

In general, if a “de facto corporation” is found, it is treated as a corporation in all respects, except that state may seek a dissolution.

The de facto corporation will apply equally in contract and in tort.

Question 17

What is the effect of Corporation by Estoppel?

Answer 17

Corporation by estoppel will be determined on a case by case basis. It will generally apply in contract only, and not in tort.

Question 18

What is the liability of ‘shareholders’ if there is no de jure corporation, and the court does not find a de facto corporation or corporation by estoppel?

Answer 18

Generally, the court will only find active business members personally liable. Their liability is joint and several.

Question 19

What is the doctrine of piercing the corporate veil?

Answer 19

Under the doctrine of “piercing the corporate veil” - the courts will disregard a corporate entity and hold individuals personally liable

Question 20

What are the three situations in which the court is likely to “pierce the corporate veil”?

Answer 20

1. “alter ego/mere instrumentality” - if the corporation ignores corporate formalities and a basic injustice occurs (example –> treat corporate assets as their own).
2. Inadequate capitalization at the time of formation - there is not adequate unencumbered capital at the time of formation to reasonably cover prospective liabilities.
3. Fraud, avoidance of existing obligations, or evasion of statutory provisions
   - the corporate veil may be pierced where necessary to prevent fraud or to prevent an individual shareholder from using the entity to avoid his existing obligations.

Question 21

What are “stock subscriptions” ?

Answer 21

“Stock subscriptions” are promises from subscribers to buy stocks in the corporation.

Question 22

What is the rule regarding revocability of pre-incorporation stock subscriptions?

Answer 22

Under the RMBCA, pre-incorporation stock subscriptions are IRREVOCABLE FOR 6 MONTHS, UNLESS:

1. otherwise provided in terms of agreement; OR
2. all holders of subscriptions agree otherwise

Question 23

What form of consideration may a corporation accept for stock?

Answer 23

Under the RMBCA, shares may be paid for with any tangible or intangible property or benefit to the corporation.

• This is interpreted very broadly.
• This includes promissory notes, promises of future work, promises of future property.

Question 24

Under the RMBCA, what is the minimum value for stock?

Answer 24

RMBCA has generally eliminated the concept of PAr.

Corporations may issue shares for whatever consideration the directors deem appropriate.

Consideration need not be placed in any special account.

Question 25

Under the RMBCA, can a corporation still specify a par value for stock?

Answer 25

YES.

Question 26

What happens if directors issue stock below par value?

Answer 26

• issued stock will still be recognized.

- directors who authorized the issuance can be held liable for their breach of fiduciary duty.